September 24, 2008

What we must do to get the monkey off our backs

Once upon a time, in a village, a man showed up and told the villagers that he would buy monkeys at â‚¬10 each. The villagers, aware that the area had plenty of monkeys, went to the forest and started hunting them. The man bought hundreds of monkeys at â‚¬10 each, and the villagers began to slow their efforts.

The man then said he’d pay â‚¬20 for each monkey, and the villagers went hunting again, redoubling their efforts. Soon the monkeys became hard to find, and the villagers began to give up the search. The offer went up to â‚¬25, but the number of remaining monkeys was so small that interest in the hunt petered out. The man then announced he would pay â‚¬50 for each monkey, but since he had to go to a big city on business, his assistant would handle the payments.

While the man was away, the assistant told the villagers, “Look at all these caged monkeys the man bought from you. I can sell them to you for â‚¬35 each, and when he returns he will pay you â‚¬50.

The smart villagers took all their money, others borrowed to take advantage of the offer and bought all monkeys from the assistant. The assistant said he was headed to the city to bring the man back.

They saw neither the man nor the assistant ever again, just hundreds of monkeys all over the place.

This little story outlines what happened in Ireland with our housing and stock markets. We believed the hype, got greedy and thought to ourselves that we could all make money for nothing. We borrowed accordingly and now are stuck with the consequences. Worse still, we borrowed so heavily to buy houses that it is unlikely Irish house prices will, at least in the next decade, reach levels seen in 2006/7. The place now is full of land and houses — like the villagers’ monkeys — that no-one wants nor is willing to pay for.

While this will affect all of us — particularly the younger generation who were duped into buying these expensive houses — the true barometer of our financial calamity is the enfeebled Irish banking system, which needs time.

The problem is time is exactly what we do not have. Events in the past 24 hours are not reassuring. Pessimists would take a look at today’s financial markets and suggest that we are edging closer to meltdown.

Yesterday, the ‘New York Times’ put it succinctly: “The cavalry have arrived, but no-one knows what they are supposed to do”. The cavalry in question is the putative $700bn bailout of the US banks by the Bush administration. The reaction to the plan has been one of horror. RTE reported yesterday that the markets sold off because of fears that the bill wouldn’t be passed. This is not correct. The markets have been frightened by the prospect of the rescue package going through.

Let’s leave the US for a moment and return home where we see that shares in our banks fell in response to Finance Minister Brian Lenihan’s â‚¬100,000 deposit guarantee scheme. Rather than enhancing confidence in the banks, the move is being seen by investors as admitting that there is a problem at the epicentre of the banking system, but not doing enough to solve it. A full guarantee covering all deposits would have been, and still could be, a much more comprehensive option.

Up to last Friday night, Mr Lenihan and his predecessor Brian Cowen were saying that there is no problem in the Irish banking system. Now, with the deposit guarantee scheme, they are implicitly telling us there’s a big problem. If it’s a big problem, let’s do something big to rectify it.

This difficulty is not going to go away. The Irish banks are like mini-versions of the American banks. The difference is one of degree. In America, the debts of the banking system are there for all to see. So when the property market fell, the value of the bank’s exposure to property fell, too. This is called mark-to-market valuations. And it means that the value of any portfolio is assessed against the price at which you could sell those assets in the marketplace today.

In Ireland, the banks are refusing to mark to market their portfolios and exposure to property, so they are pretending to themselves and their auditors that the land they have on their books is still worth the price it was bought for. But this is nonsense. If Irish banks were to value their assets against the price they could get today, they wouldn’t be far away from the fate of their American counterparts.

Both systems are up to their necks in bad debts in the property market. They have no outside funding available to them (except from the ECB) and, most egregiously, no-one appears to be able to tell the truth about the extent of the carnage on their balance sheets. So we got the pathetic bluff from Anglo Irish Bank last week that it was considering taking over Irish Nationwide. Not only do two bad balance sheets not make a good one, but the idea that we can be duped by a bank which is pretending to be a “buyer” when in fact it hasn’t the means, is indicative of an industry that hasn’t woken up to reality.

The blueprint for Irish banks now looks increasingly like Japan in the 1990s. In 1989 the Japanese property market peaked. By late 1992, property prices in central Tokyo had fallen by 60pc from the highs.

Many people in Japan expected the government to shoulder the risk of the banks and thus bad banks were offered a lifeline. It took at least half a decade from the peak for the banks to admit the extent of the problems. This was because the Central Bank in Japan sought to protect, at all costs, the banks and the developers who had become close to the political system in the boom. So instead of marking down loans and starting again with a new sense of purpose, Japan experienced a tortuous period of obfuscation and bluffs, which eventually shattered public confidence.

We need to learn the lessons of this. We can’t afford to do what the US is proposing and set up a similar toxic fund to bail out the Irish banks’ property debts. We don’t have the cash.

However, there is something we can do. By giving a full deposit guarantee now, the State could re-energise creditors’ — both big and small — confidence in our banks. In fact, given what is happening all over the world, a comprehensive guarantee would prompt foreigners to lodge their money in Irish banks. As a member of EMU with the lowest State-debt-to-GDP ratio, Ireland would be ideally placed to offer itself as a financial port in this international storm.

There’s a real problem here.
Although a full deposit guarantee is an attractive idea, it has the same flaw as the refusal by the banks (and the US Fed) to mark assets to market. If one assumes that the amount of money in an economy is an approximation to the value of the economy, then refusing to deflate the money supply in this way will result in price inflationary pressures down the line (more money than value) . This isn’t a free market solution.
On the other hand, forcing the banks to suddenly ‘come clean’ isn’t necessarily sensible solution either because it will result in a shock to the system as, in a free market, they’d have marked to market all the time, so we’d have watched the numbers fall over time & got used to it.
The brutal question is, how do you reduce everyone’s standard of living, to the extent that reflects the economy, without a totally irrational response (blood on the streets, panics, and people just giving up and walking away from underwater properties, excessive savings, etc).
Inflation would be the obvious solution (5% over wage rises a year for a few years should do it) but that’s probably not possible (Japan tried to create inflation in the 90s, and failed).
As is so often the case, it looks like a social problem, so requires a political solution. Tax?

Whats going on no in the states @ the moment is exactly whta happen during the major stock market crash of the early 1900′s. There was a great bail out was put in place but in turn was ignored by market particapants ……… The financial memory only lasts about 30 years then analysts, bankers and regulators fall victim to greed and fear. No matter how much they fiddle with interest rates & the system, Bob Marley said it best: “One day the bottom will drop out…”

Excuse my lack of expertise on monetary and fiscal matters, but as a joe soap citizen and a observer of this current finiancial crisis, questions continually arise despite your respected efforts to lay it out plain and simple on this site.

On a previous article you mentioned a figure of 300 billion on deposit in Irish Banks, accepting that figure to be accurate I fail to see how a government gaurantee of all deposits would bring confidence back into the system.
On the face of it, it is easy to understand – government gives assurances – panic subsides – credit flow returns to the banking system.
But, going back to that 300 billion figure, and to quote you from your article above ‘we dont have the cash’, how could the government possibly gaurantee protection for 300 billion worth of deposits? If the government were to annouce such a thing the first thing I would do is begin to worry (a lot!). It is quite obvious to me that the government could not in any possible way make such a guarantee. While it may give the assurances as mentioned above, it would still fail to resolve the issue – bad debt, and lots of it.
A full guarantee on all deposits would do nothing but defer the crisis for some time. In which time the government would need to establish a fund that would cover those deposits in the event a complete financial meltdown – i.e, taxes would have to rise drastically and immediately.

I think David needs to explore the idea that inexperienced investors, who have not yet directly experienced the consequences of a market downturn, are more prone to the optimism that fuels the bubble…

In seems obvious from what has gone on in Ireland over the last 15 years that the most Irish investors appear to be trend-chasers….

This trend chasing behaviour reflects our attempts to learn and extrapolate from our limited experience as a nation in investment activities. Such extrapolation may be excessive if not properly adjusted for the small amount of experience at hand. Taken together, the facts are consistent with the popular view that inexperienced investors are susceptible to buy assets with inflated prices during bubble periods. It is not surprising to learn that inexperience can be costly. But the interesting aspect of this is that a bubble can only arise following the arrival of a new generation of investors who are willing to commit their capital to buy overpriced assets

We can hardly call Greenspan, AIG, Lehman inexperienced and they screwed up worse than most in this bubble. Mind you they were playing with someone elses money and you wont see to many of them living on the streets.

Part of the problem seems to be that staying out of a bubble is costly also. Take house prices, sure from 1995 onwards they were rising significantly and were in dangerous territory from 2000.

What I find interesting is the terms crash and bubble…it seems to be fine for stocks but misleading for property….. it implies we all wake up one morning and your house is worth half of what it was…. everyone knows they’ve screwed up and should have sold the week before…. It seems to be have more like a pendulum, the property bubble actually burst in April 2006, but few people spotted it…and its only recently that movement has been significant enough that denial is no longer an option …

The increase in the Deposit Protection Scheme was necessary after the Joe Duffy cock-up – without a balanced market, and with lots of panic movement of funds into An Post, the government was forced into action

David your proposal for Ireland attracting loads of dosh from worried depositors worldwide, if the minister for Hardship fully guarantees all deposits, may be a little disingenuous.
Surely such a guarantee would require Draconian stewardship of such funds by government appointed overseers to protect the state from the bankers avarice and a possible repetition of what’s happening currently.
Now I ask you, what did Fianna Fail ever put their hands to -or what quango did they ever create- that ever functioned with any degree of competence or efficacy.?
Your proposal might work in Switzerland or Sweden- but Ireland?
God help the irish taxpayer in the unlikely event of your proposal ever being taken up.

David > a comprehensive guarantee would prompt foreigners to lodge their money in Irish banks. As a member of EMU with the lowest State-debt-to-GDP ratio, Ireland would be ideally placed to offer itself as a financial port in this international storm.

If Ireland chose to guarantee all deposits, would the value of these deposits appear as a liability on our national balance sheet? Using your figures this would mean a â‚¬300 billion liability at current value. If it was used to attract foreign deposits then the figure could quickly ‘bubble’ out of control.

Why should we saddle ourselves with a liability that can never provide a return? Previously you have asserted that the risk would be minimal, and while I agree that it is, I think even minimal risk is too much when you look at the sums involved. The risk-reward ratio, when the reward is nothing more than a short-term confidence excercise, is not attractive in these circumstances.

As long as house prices fall (a ‘price dislocation’ to our banking friends) confidence will be low. There is no short cut out of this market correction, either for the banks or the monkey-catchers. We had the gain, now it’s time for the pain. Any measure that tries to artificially ease the force of correction is only slowing down the inevitable and by extension, pushing the recovery further into the future.

The banks do need to come clean, for their own sakes. The politicians need to look after their constituency (us) and do what is in our best interest. It is not going to be easy for anyone, and there will be plenty of blame to shovel around, but the quicker we start down the hard road the better we will be positioned to take advantage of the recovery when it does come. And it will.

The investor warning ‘Prices can go up, as well as down’ is true in any market.

The Irish economy is banjaxed and will take a decade or more to recover.Fianna Fail screwed up again, what do you expect when there are so many dynasties in Irish politics.It is as bad as Pakistan and India!.If Britain has a recession as bad as the early eighties there will be 400,000 unemployed in Ireland.Makes the eighties and fifties seem idyllic.

You say that “In Ireland, the banks are refusing to mark to market their portfolios and exposure to property, so they are pretending to themselves and their auditors that the land they have on their books is still worth the price it was bought for.”.

While it may be easy to fool the general public; I do not understand how any auditors can be mis-led? They know the state of the Irish property market and they have access to the banks’ books. When can we expect to see the auditors value “assets against the price they could get today” and thereby expose the carnage on the banks’ balance sheets? Or are there some accounting standards that allow auditors to be complicit in opting for a more favourable valuation method?.

Yes, this article makes things quite clear. Good to see this kind of writing. Although I don’t see how the state can realistically make such a guarantee without courting bankruptcy itself. It’s not as if the ECB has loads of cash to dole out in loans itself.

My own contribution to coming up with a solution would be as follows…

(a) have a national debate about what property SHOULD be valued at, in light of ethical and moral considerations, rights, how much money will reastically be available to loan in the future financial climate etc (3xsalary?). Legislative measures should be taken with regards the media to ensure ALL arguments are presented clearly, and perhaps public spaces should be set up where the public might go to debate the issues themselves.

(b) have a ‘test-mark down’ of all the property assets on the banks’ books in light of this debate… Take a hard, sober look at what the figure will be to re-capitalise the books.

(c) Decide as a nation how to re-capitalise the banks. I would put forward the case that the majority of the burden should fall on older richer generations, rather than promising away the future earnings of the young. The bulk of the opportunist property gains must be tapped somehow, to be put back into the system. This is a very difficult challenge (how to address cute-hoorism??).

Basically, honestly assess the damage, and honestly decide how we are going to pay for it.

Sorry – and precursor to said proposed debate should be promulgating the understanding that the representation of ‘interest’ and ‘opinion’ are entirely different political phenomena… And the proposed debate should about representation of opinion… not ‘interest’.

Another interesting thing is that the “affordable homes” quango set up by Fianna Fail,- ostensible to assist the lower paid in purchasing a home of their own-resulted in the better paid getting their homes-not the really lower paid it was supposed to be for.!
Prices had gone so high that young people who were on what was once considered good salaries-and would normally have bought their own homes without any subsidy or support from such outfits- were now qualified for such schemes.
People earning 50,000 Euros a year are now the co-owners of apartments with Dublin City Council. These people would in any normal economy have bought their own apartments without any state support. Therefore even such schemes/quangos as the “Affordable Housing Partnership”
These schemes were never implemented while apartments were selling like hot cakes,- when they eventually got off the ground, they became life support systems for the middle class young buyers on reasonably good salaries, and were nothing but another artificial boost, in the mad property bubble.

Your facts aren’t even correct. There are three housing schemes in operation. One involving total ownership by the buyer with limitations on re-sale, one part ownership/part rental and the third is the traditional type of rented council property. There is no quango – it runs through the relevant LA’s.

Your deductions and labelling are so out of touch its not worth commenting on your conclusions. ‘Working class’ postmen and labourers earn more than educated ‘middle class’ teachers and have done so for a while. Wake up would you to 1998 not to mind 2008!!!.

Although cultural similarities between Japan and Ireland are few, there is one political similarity in that both countries are ruled by one the most electorally successful political parties in the democratic world. As a general rule of thumb, I find that democratic states dominated by one political party tend to be far more corrupt than those with relatively frequent but stable alternations in power, with a culture of evasion, denial and an utter unwillingness to take responsibility for one’s actions. I know little of Japanese economics or society, but it seems from David’s article that its banks and its Central Bank were more concerned with covering their own behinds than admitting to the public they got it dreadfully wrong and risking a punishing political fall out. Irish banks and government politicians seem to be playing the same game. I am not sure if John Hurley deserves to be the highest paid central banker in Europe, nor Cowen the highest paid PM. And as for those bonuses……

The beauty of the American system is that its founding fathers recognised the inevitable corruption that ensues when concentrating power in the hands of the executive, and properly divided up power between the different branches of government. For most of its 230 year history, the presidency has been held by one party, one or two of the legislative branches by the other, the judiciary a mix of both.

The Bush administration was a tragic excpetion to this rule (Cheney’s theory of the “unitary executive” sounds like Albert Reynolds’ dictum “the Irish people want decisive government”), but the Bushies needed the cataclysmic events of 9/11 to get their way, especially with the Patriot Act. I am not sure if other countries’ democratic systems would have survived (Reichstag fire and the Enabling Act anyone?). Either way, the most powerful country in the world, at the zenith of its power because of a system that prevents the concentration of power in too few hands, has fallen from a great height following at least 5 years of a departure from that simple rule. At least the American people have woken up to that fact.

We, on the other hand, have a State the political system of which was strangled at birth and in which the Right dominates no matter who is in office. The Labour Party can change this, if only they realised.

No we have subsidization of the property market. But it is subsidization in order that people will buy homes and the government will preserve it’s tax take. The ultimate joke in state taxation policy. Subsidies to increase tax. A case of Ireland being a dog that is chasing its own tail. If ever a sign was needed that the Irish economy, Irish society and the Irish state is too pre-occupied with property this is it. The market at least reflects the underlying reality. The property euphoria cannot be sustained. The Lemmings have jumped over the cliff and they won’t be coming back.

There is no accountant or economist in the cabinet. I don’t evenb think there is a single business man. And this is problem numero uno. I don’t care how many times Cowen was in Hot Press magazine, or how many liberal platitudes Brian Lenihan received for changing nothing as Minister for Justice. They are both untrained to deal with the crisis. Compare that to when McSharry (a cattle dealer) or Reynolds ( a pet food factory owner) held the two key ministries of Finance and Industry/Commerce. Massive difference in tone and attitude. The government approach is now to reassure us. But nothing by Reynolds or McSharry was supposed to reassure us. In fact most of the time they were telling us that things are at least as bad as we know they are. They were problem solvers. They spent their lives being problem solvers before they became ministers. Neither of the two Brians had that apprenticeship. Both jumped into safe seats, and were trained lawyers – good at avoiding facts and talking about stuff that did not matter.
We need problem solvers to fix the problem. We do not need ‘reassurance specialists’ or legal eagles trying to talk around the problem and tell us that officially it is not really a problem. People have wised to that sort of thing.
The crisis is far to serious to have lawyers running the country !!! there is a reason why people ring up radio shows asking for Micheal O’Leary to take over the running of the country(to get results and cut down on waste), or asking to put Roy Keane in charge of the HSE (to cut out all the amateurism and scare the titleholders into doing some work). It is for the same reason that people were listening to responding to the Joe Duffy Show and ignoring all the reassurances last week.

Fergus > I find that democratic states dominated by one political party tend to be far more corrupt than those with relatively frequent but stable alternations in power.

I could counter that argument with Italy.

Interesting aside on this point. There are only four states in the world that do not describe themselves as democratic, namely Saudi Arabia, Brunei, Myanmar (Burma) and the Vatican. That’s two of the richest, one of the most oppressive, and the holiest.

As Winston Churchill said “democracy is the worst form of government except all the others”

While the christian democrats were in power coruption was rife. As one Italian politician famously said “the monastry is poor, but the monks are rich”.

But the demise of the Christian Democrats following the tangentopoli scandals did little, if anything to improve the situation. Corruption is still endemic, as illustrated by the collapse of Prodi’s government in January of this year.

So yes, long term one-party rule leads to corruption, but changing the guard will not solve the corruption problem. Corrupt politics attracts corruptable politicians.

You are right to look to politics, after all it is the political arm that weilds the economic sword. Problem is, political discussions tend to be more polarised. So, as the Italians know, achieving progress is harder.

Firstly; one solution would be to get the money back from the land sellers and house sellers who managed to sell their lands or properties for up to 3 or 4 times the price it was really worth. Their profit was made on pure speculation, it was never worth the money they sold them for and that is one the simple reasons why we are in this mess at the moment. LADS THAT IS WHERE THE MONEY IS RESTING, IN THEIR BANK ACCOUNTS! THAT MISSING MONEY WE NEED SO MUCH IS THERE. (I’ll pass on all the scavengers ie; estate agents, mortgage brokers, bankers for whom these high prices meant bigger fees, commissions, bonuses even!) The sellers/freeloaders are the real criminals. One needs to get access to this money that has been stolen from Irish people. Secondly, the current government must be prosecuted for having allowed this to happen, knowing well what the possible repercussions might be. I DO NOT want to see the Irish banks being bailed out by the tax payers’ money even if it means hard time for the Irish nation, let them rot. Thirdly no politician in Ireland needs to be paid the sort of salaries they currently getting to govern… 4 million people, come on!
To me it looks like Ireland has been a place where the current political party allowed only some people to get ultra rich, which allowed in turn the polticians to get these astronomical salaries, and guess why they are not going to run after the 30 000 or so millionaires in Ireland… The current politicians created an economy of super rich people and others about to live under the poverty line. Well done! You are about to become a kind of Modern Civilised Third World country.
The point is though, we all know where some of the money is and I suggest that before any bailing out for the banks is even uttered, the government should look into introducing a serious wealth tax for these super rich because that where all the Irish people’s monies are. THEY NEED TO GIVE IT BACK TO THE PEOPLE WHO ARE NOW STRUGGLING BECAUSE OF THEIR GREED.

I can understand your frustration but the idea of getting money back from those who profited by selling their properties for “3 or 4 times the price it was really worth” is not a runner. No one forced people into buying these houses, it was their choice. Remember that old saying “buyer beware!”

The issue you have with estate agents, mortgage brokers and bankers, I think that we should be pointing the finger of blame at the government. They allowed this property cabal to operate and now we find ourselves in the mess that we are in.

Great idea! Guarantee all deposits in Irish banks 100% and edgy foreign savers will flock to Ireland with their nest eggs. In the process, they will have to buy themselves an Irish address, so they can show their bank of choice a utility bill as proof of residence; et voila, a new property boom is in the making…

That’s what i would call killing two birds with one sliothar!

By the way, the edgy foreign savers with nest egg is in Sterling or US$ would have to think real hard moving it to Ireland, as the Euro has become relatively strong in the past 12 months.

Let’s catch the Man and his assistant and skin them! Hang ‘em high! Our own Taoiseach resigned out of embarrassment due to controversy over a few quid and yet the heads of banks in America who were the architects of this disaster walk away with bonuses of tens of millions of dollars. What went on was reckless trading of houses and yet no laws were broken as such. There should be a department in every central bank acting as a watchdog from now on to safeguard against this ever happening again. I wonder what Nick Leeson thinks?

If we agree that the decline in house values is at the core of the problem, meaning that declining mark to market valuations put pressure on bank balance sheets, then isn’t the difference between US bankruptcy laws and those in Ireland a major factor which may prevent the type of rapid decline in house prices seen in the US from happening here? Would this not provide some limitation of risk to the stability of Irish banks?

In other words, in the US, struggling householders are often better off declaring bankruptcy, throwing the keys back at the bank, and walking away from a property that they are in negative equity on. In Ireland, as in most other countries, a borrower is personally liable, while in the US lenders usually have no recourse other than foreclosure. Foreclosures further depress house prices and aggravate the slump.

My feeling is that if house prices drop by 50% – 60% in Ireland then we will see real trouble, but so far Irish house prices though declining, have not fallen as fast or far enough. The decline in house prices here has not been as dramatic as in the US, I am wondering if the reason for this is borrowers here do not have the same ability to walk away from mortgages as they do in the US?

The Irish house price bubble is the most ludicrous asset bubble since the tulip. It makes the bubble in US housing seem like chicken feed. Why are we not seeing a rapid and total collapse of prices?

David, well done for highlighting another possible ‘policy’ decision which could have the potential of giving Ireland back a competitive advantage in the flow of foreign and Irish outward invested capital. It would take “Liathroidi”…

Let’s hope the Budget in 2 weeks has ‘innovative’ decisions to attract export oriented companies, capital and people to Ireland so we can move the ‘pendulum’ back towards some demand levels for commercial and residential property to meet the current oversupply. If we don’t act this year/now it may be too late, the alternative is worse than the risk !

my reference to “middle class buyers” is obviously a touchy subject with Mr Joe Rourke, re the affordable homes debacle. Nevertheless my point is unassailable. People on good incomes are now the beneficiaries of this scheme which was heretofore intended for the less well off, who were ignored by local authorities, when it suited them to take cash in lieu of honoring their obligations to those who could not afford to buy property on the open market.
No doubt the coming budget will provide further funding for them to take more of the unsold apartments off the hands of the developers.
The only beneficiaries of this largesse will be the grateful developers, and those who in a normal market would not be offered-or would not need to come to the begging bowl to buy an overpriced flat.http://www.soldiersofdestiny.org/affordablehousescam.htm

Not to be alarmist but this whole thing is way bigger than fluting around with Irish developers and house prices falling a few percent. I even think that Davids article was out of date as soon as he emailed it to the paper. We have just had the 9/11 of the financial market.

All the wheels have come off the entire banking system. Apparently completely unseen.

Nothing has been said about the auditors of the banks. Accounts were signed off that were obviously unchecked.

None of the main chancers lost their jobs.

If no heads roll then we have been the witnesses to a $700 billion bank robbery.

Another fine commentary David. Our so-called Government could learn a thing or two from your outside-of-the-box thinking. Why you haven’t been either snapped up or assassinated by now is one of life’s mysteries.

> The cavalry in question is the putative $700bn bailout of the US banks by the Bush administration. The reaction to the plan has been one of horror. RTE reported yesterday that the markets sold off because of fears that the bill wouldn’t be passed. This is not correct. The markets have been frightened by the prospect of the rescue package going through.

The markets are like a rabbit caught in many headlights running across a motorway. It is skittish, it is unreasonable, it is illogical. It could get crushed, it may get across. It could stop and sit there for a while which kind of happened last week it seems and spooked the authorities. There is no way of knowing. We need to get the trucks and speeding cars off the road, but is that possible.

The 700 billion bailout is not a typical move. It will reward poor market performers, and that is never a good thing. The size of it is small compared to the recent acquisition of Fannie and Freddie, but in less than a few months the US Government debt has more than doubled! That is a dislocation. Whether it passes or not is a moot point because for the US net position, it is the same, its just a movement of reward from those that made mistakes to those that didnt, the taxpayer, the mobile home dweller in alabama will pay in the decades to come, or their offspring.

I think whilst it is interesting to look at the US, the main affect for us will be the knock-on effect. Mainly how US MNC’s are affected as I dont think our banks are counter-parties to bad loans over there. Some US MNC’s may double up their efforts to boost exports, innovation, etc, so some may do that here and may therefore invest more in Ireland. Some cash strapped may switch out of Ireland and do it elsewhere. Most betting money is on the latter scenario but for now we dont know. If we reduced our cost base, hacked off 100,000 of public sector staff and/ore greatly reduced their benefits (ie: self funding pensions and cant they pay the same PRSI as everyone else??) we would have more of a chance. The proverbial ball and chain.

> Let’s leave the US for a moment and return home where we see that shares in our banks fell in response to Finance Minister Brian Lenihan’s â‚¬100,000 deposit guarantee scheme. Rather than enhancing confidence in the banks, the move is being seen by investors as admitting that there is a problem at the epicentre of the banking system

The 100k move was long before its time and was needed due to the sheer number of accounts that were 20k plus. There are far far fewer that are 100k+. The guarantee is a level of ‘insurance’ and only applies when their is a defaulting bank. We may not have any of those.

A full guarantee wouldnt bring in that much business. What is key for desposits are interest rates, currency, etc. If people are looking for those, full guarantees mean little. Look at An Post Savings Bank for example. It already had a full guarantee yet due to its low interest rates it only has a small percentage of the deposit taking market. There are not queues of foreign investors coming in looking for that.

Another thing to note from the deliberations of the US house commitee with Bernanke and Paulson: The level of reluctance was high from both sides. Also, the topic of Credit Swap Derivatives was raised, and the trillions that are involved in off-balance sheet and unregulated debt. The call was to regulate, but like a Barings 888 account, when more than the margins have to be paid, will this huge invisible pillar that is seemingly holding a lot fall down? I watched with horror over the years as it was built up, its ballooned something like 100 times in the last decade.

Money for nothing ….. Dire Straits perhaps.

MK

ps: apologies to other responders, I didnt get the time to read your input yet, will do later hopefully.

I forgot to add, another ‘smaller’ problem the US has is the level of private sector credit, non-mortgage. This is in the region of 2.6 trillion, so thats credit card debt, car loans, Sallie Mae, etc. The US consumer has been the mainstay of the US economic growth over the last while, and when mortgage related debt instruments were drying up, they binged on other forms of credit.

The last few lines of the latter show that levels are at an historic high. But check out the rate of change between the ratios of Q1 and Q2 2008. That is a dislocation that happened in Mar-Jun, perhaps the effects of which are playing out now.

Paddy Cullen said “The financial memory only lasts about 30 years then analysts, bankers and regulators fall victim to greed and fear.” This is a particularly insightful comment.
Back in the late 1970s an analysis of major wars, oil and gold prices over the previous 100 years showed a cyclical interdependence that peaked every 28 years. It also had an underlying slow but exponential dollar inflation effect that predicted the recent spike to over $100 per barrel. This oil price trend suggests oil price will drop to $30 within a few years but will build to $900 by early 2030s.
The explanation suggested then was that the average human replacement generation in the western world is about 28 years. Although individuals are born at any point within the macro economic cycle, the collective effect is that each generation fails to learn from the mistakes of the previous generation–hence the 28 year effect.

MK, that 2.3 Trilliion pays for goodies from China and Germany etc. I think the big hits for ireland will come from

1) Slowing global growth as the US stops spending. This will impact every currency and economy. I think the financial system there has had it. What next? One wonders why one cannot just wipe the databases and start again. Get the deeds of ownership sorted and fixed independent of the failed financial system and restart. Do it in 12 months and invent the NewDollar.
2) UK financial crisis – while not as bad as US maybe, they are a hollowed out economy
2) As you say, those MNCs leaving becasue they are running out of cash & business
3) Slowing investor confidence in all things financial here – particularly financial as the street cred is simply not there. That 100K “guarantee” was a blunder.
4) Massive public service bill. Either we recognise the game is up or it will be curtains anyway becasue the economy will simply buckle under the strain
5) Falling and failing skillsets – Ireland gets dumber as we loose manufacturing/engineering and science knowledge – (big issue in US & UK as well).

Real leadership is needed here. We need an all-party coalition to come up with a solution that works. We need to recognise that we really are an island and there is too much hurt out there to expect any foreign cavalry to help us. Europe may assist – but there will be too much fragmentation there to allow meaningful discussion. It is still not cohesive enough.

MK said: ” the US has is the level of private sector credit, non-mortgage. This is in the region of 2.6 trillion, so thats credit card debt, car loans, Sallie Mae, etc.”
A couple of months ago, most of us thought that a Billion was a Very Big number. Now people are talking about Trillions of debt quite casually –total derivatives X hundred trillion or whatever.
Actually a trillion is not a number beyond human comprehension.
Take an ordinary piece of millimetre squared graph paper that has 1000 divisions per metre. A square metre of this will have a million tiny squares. If we can think of a cubic metre made up of tiny millimetre cubes there will be a billion little cubes in a cubic metre.
If we extend the analogy to the size of an average detached house, say 10 metres by 10 metres floor plan and 10 metres high, a large cube this size would contain a trillion millimetre cubes. Wife says there are probably a trillion dust particles in this house right now–isn’t it time you did a bit with the hoover?

Malcolm > Back in the late 1970s an analysis of major wars, oil and gold prices over the previous 100 years showed a cyclical interdependence that peaked every 28 years.

This is a very valid point. But I wonder how much the current levels of debt, both private and government, will skew the cycle.

As MK points out, the US are facing the double edge of massive personal (both mortgage and unsecured) and Government debt. This can only be possible in a Fiat money system, where the first respose to liquidity problems has been to ‘helicoptor’ money into the economy.Perhaps this will break the 28 year cycle because the next generation will be left holding our bills.

I have another visualisation for a Trillion Dollars.
Take a $1000 bill. Lay it flat on the ground. Place another on top of it (flat). Repeat the process. When your pile is 67 miles high, you have a trillion dollars.

It is only four years ago that Japan’s banking crisis seemed close to triggering a global recession.
Most of the big banks were in trouble and many seemed to be heading towards bankruptcy.
Given their wealth and global influence, it was often said that if one of the big Japanese banks went under, it would trigger a financial crisis that would spread around the world.
That did not happen, mainly because the Japanese banks purged their bad debts before they went out of business.
It was an expensive and painful process, but could provide a guide as to how America and Europe should respond to the current turmoil.
Property-linked lending
First, a reminder of how bad things looked in 2002.
At that point it seemed almost inevitable that one of the huge Japanese banks would find itself insolvent.
It became clear that they had a severe problem with bad debt – money that they had lent to companies and individuals who could not repay it.
During a property market boom, the banks were happy to lend to builders and developers, especially those who were putting money into offices and shops in big cities like Tokyo.
Then property prices tumbled and the developers could not repay their loans.
That has a parallel with the sub prime lending problem in the United States, although in America it was primarily the low income home-owners who would struggle to pay their mortgage that caused the banks trouble.
Painful decision
The result was the same, though.
Banks were losing money in loans to people who could not repay them and whose collateral, the value of their property, was less than the value of those loans.
The Japanese authorities agonised over what to do.
They slashed interest rates to zero. They pumped money into the financial system, just as America has.
But in the end, they took the expensive and painful decision to use tax payers’ money to help the banks write off the bad loans.
Making money
The price was enormous.
At least $100bn dollars went on the programme.
The Bank of Japan lent money to institutions at special rates and also bought some of their shares.
The money came with an important proviso; the Bank of Japan wanted full disclosure of how serious the problem was and a promise from the banks not to let it happen again.
When the figures were made public, they caused shock.
In many cases, this hit the banks’ share prices and caused anxiety to both customers and investors.
Yet by 2006, most were back in profit and credibility was restored.
The Bank of Japan even managed to make a profit from the whole affair, through selling the shares it bought at the time for more than it paid for them.
Falling shares
However, there is a sad epilogue to the story.
Japan – as of September 2008 – is once again on the verge of recession.
Part of the problem is the exposure of Japanese banks to the sub-prime market in the US.
Furthermore, banks such as Aozora and Shinsei have been lending money to Lehman Brothers, which filed for bankruptcy protection earlier this week.
Their bad loans to Japanese customers may have been dealt with but they are still effectively lending money to Americans who cannot repay their debt.
This accounts for the sharp fall on the main Japanese share index, the Nikkei.
Strong export sector
Yet the Japanese economy is not entirely dependent on the fortunes of its financial services companies.
Japan is rich because of scientific innovation and manufacturing, even though a lot of the factories that make Japanese-branded goods have moved to China.
For that reason, the turmoil at the banks and on the stock market will not necessarily cause deep alarm.
Even the return of a recession will be tolerated, provided the engine of Japanese growth – its booming export sector – continues to sell to the rest of the world.

Stephen Kenny > how do you reduce everyone’s standard of living, to the extent that reflects the economy

In times of recession which is now official here, we can borrow as a government and we will do that. I dont think we should break the 3% limit, at least not by much. Whilst the 3% figure is ‘plucked out of the air’, we need to stick to something. The euro club has the 3% rule, and we benefit by being in that club. Else, set our own rule and leave the club, which may have some short term advantage allowing us to borrow 5-10%, but it would be folly. Better to borrow 3% and run the government depts more efficiently. Keeping to the 3% forces us to and is good discipline and is what we should be aiming for. The pension fund payments (NTMA) should also be postponed and the scheme re-assessed.

Garry > they were playing with someone elses money

This is one of the problems in businesses in general and how things can get out of whack. Staff can get paid on short-term gains only to be gone for the long-term pain. Changing that would require changing labour laws and would require it to be EU wide so we are not uncompetitive in comparison to others.

Lorcan Roche Kelly > If Ireland chose to guarantee all deposits, would the value of these deposits appear as a liability on our national balance sheet?

At the moment, the deposit protection scheme is paid into by deposit taking institutions and held by the Central Bank. It may even be held as an asset. The state guarantee works in the event that it doesnt have to be called upon, and is not intended nor can it work in a 1930′s type of run on banks where all money is withdrawn. Its there for one-off’s or the two’s perhaps, not the system, not the whole shebang. Its like car insurance. The model fails if all cars crash on the same day (or even week!).

Lorcan Roche Kelly > There is no short cut out of this market correction, either for the banks or the monkey-catchers. We had the gain, now it’s time for the pain.

Agreed. The only thing that can be done is to spread out the pain to more people (so it is less intense per person), even innocent people (as the US is doing) and spread it out over time. It cant be avoided. Its gravity. The apple is falling.

Peter > Or are there some accounting standards that allow auditors to be complicit in opting for a more favourable valuation method.

Auditors are only concerned that treatments are within the IFRS rules. Asset valuations dont have to be written in at market values on the way up or the way down. They have to be reasonably accurate in line with the financial year, which as we know with most companies will be at least 6 months ago and on average even more. And many valuations will be based on opinions. What is an unfinished shopping centre or apartment complex actually worth? Actual market prices, which many in the US seem to be calling firesale for some reason, dont have to be applied.

> The bulk of the opportunist property gains must be tapped somehow

Its hard to do that as the horse has already bolted. We could apply a wealth tax but its not easy to distinquish between those who got wealth ‘genuinely’ and those that flipped, although looking at Ireland’s rich list it would seem easy. Maybe just nationaise the assets of Ireland’s 100 richest people, get them to work for the state (they could work in the Joy in the kitchens). A bit radical and junta-istic but it would only lose 100 votes! ;-)

> The beauty of the American system

You gotta be joking, look what their system has produced. Its a disaster.

> 4 million people, come on!

The problem is/was that 25% of our economy was caught up in construction and supporting it. So that’s 1 million people (which includes their kids and other dependents and elderly). Think of them as body-snatchers, they are within us.

> Irish house prices though declining, have not fallen as fast or far enough

Correct, house prices here have fallen by 10%, that’s those that sell. Its a sticky market on the way down. You can throw your keys at a bank here. Stop paying your mortgage, they will have to repossess it, and like all financial institutions are likely to sell it (the same as foreclosures). This is happening in Ireland today. Whilst not at the same rate as the US.The prices achieved by the mortgage companies are much better than the US. In the US it can be as bad as 3% (three!) of the loan! 3c on the dollar. Morgan Stanley was trying to sell 30 billion of their collateralised debt for 22c on the dollar. In Ireland we are at most likely at the 95% level or so, so a completely different scenario thus far.

David, do you ever chat much with Dan McLaughlin? Whilst I have nothing against Dan, he was particularly bullish when this property bubble in Ireland was on the way up and is now audibly more sheepish when interviewed, etc. Obviously his employers are a bank which has always hindersed any economist from being a “free thinker”. Maybe you’ve had a quiet coffee with him.

There is a difference between the US and Ireland. In the US you can declare bankruptcy throw the keys back at the bank, and spend a few years rehabilitating your credit, so you can buy back in at a reasonable price. That’s almost an incentive to let the bank foreclose on a house that you vastly overpaid on.

Try that in Ireland !

Therefore it’s reasonable to assume that far fewer Irish mortgage holders will walk away from their homes, leading to relatively fewer foreclosures and a less drastic decline in prices, though probably a much longer period of stagnation.

The only wildcard here is the depth of our recession. I suspect if we see a very significant downturn with large scale layoffs then banks will have no option but to foreclose thus triggering what will be at least a 50- 60% decline in Irish house prices

With all the sh1t going on at the moment I think you should be milking the “mess” while you can and writing daily articles. You know, make hay while the sun shines. Like the builders did during the boom. Now its time for you boom. Go for it.

I dont fully agree with your theory that the Government should fully guarantee all deposits. It would create a massive capital influx to the banking system which would give the irish banks a big wad of cash to lend out to home buyers again, which they probably would because that “always makes money” and the whole thing would start again for a while until it grinds to a halt again in 2 years time. Am I crazy? Maybe. But its hard to teach an old dog new tricks and giving that old dog called the irish banking system a pile of money means he will probably get up to his old tricks again.

Anyway, events of the past few weeks are remarkable. How did so many such powerful wealthy and bright people in so many countries get it so wrong? It is an amazing thing indeed. You couldn’t make this up.

Thats my two cents. (Probably devalued to 1 euro cent by the time this post is read by the looks of what is happening to the dollar.)

That which has already died cannot be revived, no matter how much stimulus paper you through at it. I am of course referring to the International Monetary system. The only
solution is a political global consensus to write of the 500 trillion worth of gambling ious
(derivatives ) and start again, a new financial architecture that is. It follows that the US
bailout attempt cannot work nor could it ever have worked except in creating a hyper inflationary blowout of the dollar, the only currently existing unit of international value
on which international trade depends. Dollar with no credibility equals no international trade, hello dark ages. Nor will the ramblings of a DM or any other monetarist magician
save the day. You see my dear deluded armchair economists, of which I am one, the
problem is simply a failure among the leading heads of state to recognize that which is no longer alive, the international monetary system that is. We need a new one , one which
will allow us to get on with the business of producing real value and to return to our posterity that which we have stolen.

Anybody who thinks they can the construction deveoplers millions is missing the point….it is impossible….well hidden far far away….but there stopping Bertie Ahern’s pension is theoretically possible in the light of the Tribunals.

We have many problems in this country. The biggest problem is the inate complexity involved in trying to get simple public tasks and projects completed. I am not talking about dealing with residents associations. No the professions are the problem. Everything in Ireland is rigged in such a way that the professions are formed into associations, which charge exhorbitant “economic rents”. This has the effect that the entire procedural framework for public tasks is made unecessarily long. If we had a public service ethic that demanded that the common interest was given consideration, then public projects would be much more effectively and cheaply completed. Any opinions ??? (By the way all political parties are responsible for this – but FF have got really bad in this regard since 1997).

deco>No the professions are the problem. Everything in Ireland is rigged in such a way that the professions are formed into associations, which charge exhorbitant “economic rents”. This has the effect that the entire procedural framework for public tasks is made unecessarily long.

Plenty has been written over the years about ‘rent-seeking’ behaviour in Ireland by everyone who can – state monopolies, the professions, distributors of goods & services. EU membership and regulation and e-commerce has improved matters a lot since the 80′s but it’s still there. Being a small island economy doesn’t help.

In the midst of the next few years of suffering as incomes for many fall and as the FDI sector diminishes rather than mope we must purposefully address our innate weakness in sustainable wealth creation. The ills of rent-seeking behaviour and in particular its negative effects on entrepreneurship must be targeted. We have a national innovation system that does not work and historically never did. As a nation with limited industrial heritage we perhaps tend to dismiss the boring old world of inventive design and manufacture of products as irrelevant and reach for nanotech, biotech, software, wireless telecoms and financial brokerage as a more promising future. The state has tried to pump out appropriately-trained technologists in these areas, despite the absence of a significant domestic market, in the hope that this would maintain the FDI bubble. School leavers have proven unwilling of late to buy that line and opt for such career choices, preferring instead the protected professions where ‘rent’ is more assured.

Sadly there is no direct step to a re-inflated tiger via another wave of bleeding-edge FDI screwdriver assembly. And if there was it would be no more durable than the currently receding wave of pharma, medical device and electronic assembly FDI is proving. Like those states which value, accrete and reward skill and inventiveness (‘Old Europe’, the Nordics, Japan, the Asian tigers) we must first weave a carpet of product-service knowledge and make Ireland safe for entrepreneurs capable of exporting goods and services. An early step in doing that is to remove the dead hand of the state from the levers of innovation and entrepreneurship. That means dissolving state-run occupational therapy agencies such as Enterprise Ireland and FAS, reforming state procurement of goods and services, re-focusing R&D on applied rather than pure research, re-instating third-level fees, challenging firms who control strategic networks (Eircom, Aer Rianta, Dublin Bus) and so on. Making all new public sector hires three year contracts limited to two successive terms would have interesting effects on the demographics and motivations of applicants and on the introspection of state heirarchies.

I know where you can get a few Monkey’s , just go into the Dail they are back in it now you’ll find them eating the melted chocolate in their 1.3 million euro glass sweet shop !… asking the government to consider such a scheme here , you might as well start hitting your head off the pier in dunlaoirge ( as the Americans call it !)
Regarding America and the decision to put their tax payers money into plugging this black credit hole now puts the US national debt to $11.31 Trillion dollars and to think a few years ago our Dublin pop stars were asking the west to write off the loans from the ‘developing countries’
Next month not only will winter time come in but October is also the month that saw the stock market crash of 1929 and 1987 and we will have The Biffo and Leno Budget what will these two comedians come out with ? Now I’m going to watch some old shows from Mr Ed , that horse knew a few things about saving for your future ( younger arm chair economists here check him out on u tube , RTE though might bring it back to our screens again though )

Another use could be to train monkeys to turn turf and then to foot it. We could export turf to central Europe and thumb a nose at the Russian gas pipelines. we’d get another 10 years out of the bogs, by which time house prices could be back up to 2007 levels and we could start salting more ejits again. Stay positive people.

Seriously though, Cowen has discussed the diaspora network before. This needs action. We need state-protected investment into project Ireland rigt now, like we’ve never needed it before. we’ve never had so much to lose.

A major scheme something like the initial Prize Bonds (don’t mention Dev or the Irish Press to any of them, in case they remember). Use this fund to invest heavily into PPPs for windpower, hydro, roads etc. Its looking like the end of the world but we have plenty of moves left folks.

A lot of pain has been created and needs now to be shouldered by those who created it. That DOES include people who bid up the price of houses and therefore outbid their peers. It is not just the government’s fault. We all had a hand, all of us consumers. You knew that a house wasn’t worth that amount, but you thought, hey, so long as someone else believes it is, then it is! And so it was! but now its not. The music has stopped and you’re left holding three houses the exact same dimensions and floorplan on the same side of town, you divil of an investor you. Shoulder your fair burden now.

In the meantime, the government needs to, as above, create government-backed funds NOW for PPPs for projects that will increase our self-reliance and allow us to remain a small open economy but without the oil stresses for instance. This is all doable, and major funding is needed in order to ensure whole sectors get the buying power the need NOW to get our infrastructure in place.

Stop talking about houses. They are not investments. They are about the daftest asset imaginable. Whole villages were left deserted in the West during times of famine. What was the fallback plan of our property gurus? If the house wouldn’t sell, ship it brcik by brick abroad, like the Japanese did with a Northern Ireland castle a few years ago? Sweet idea but a one-off. Unless you had turrets? Did you? Some did down our way, a few thought they were the new settlers and adventurers, by God. Villages were left empty because, shock & horror, you can’t eat ‘em and you can’t, even now, bubble wrap them and sell them through Ebay.

Let’s see ideas here for turning this thing around. less of the post-mortems. Ultimately time will tell whether Poster A was 5% off or 25% off. Irrelevant.

David’d postings a few weeks ago, re the Central Bank channelling more EU central Bank money into non-property investments, as a form of a swap, would be a tremenduous platform were it to be backed by the government (while we still seem credible and do have a reputation) and offered to our diaspora.

Sorry, I of course meant the Sweepstakes, not the Prizebonds. But you get the general idea. Appeal to the diaspora with clever, wealth-producing investments. (mental note – not houses or commercial property).

Ger Kennedy asks: “How did so many such powerful wealthy and bright people in so many countries get it so wrong?”

I think the problems are far bigger than any individual can really grasp, never mind a committee of monkeys!
For a layman like me, DMcW is making a good attempt at clarity on the situation. So is this guy:

Many people have said it here, but surely we don’t have to wait until the Americans realize that their fast-dwindling reserves should perhaps be partially diverted into infrastructure and energy-replacement projects. A “New Deal” for Ireland? Sure, why not, except that there doesn’t seem to be anyone competent enough to set one up.

For infrastructure, what about bringing in the the Chinese or the Koreans? They can set up and manage infrastructure projects much better than we can.They can build roads, ports, rail systems in a fraction of the time that we can, and the end result is much better too. Our construction people have had their day in the sun. Let them jet off to wherever they like (though it would be nice if the Government could get a bit of cash out of them first).

Energy-replacement? Ok, the turf’s rightly protected, but maybe the French could teach us a thing or two about nuclear power (as they’re going to do for the UK). And – unlike with construction – I suspect that there are some home-grown experts on wind and tidal power even if they are currently regarded a quacks by the powers-that-be.

Last but not least, we have plenty of good earth and growing weather and even countries like Japan and Korea would give their eye-teeth to be able to use it more productively (with the aid of plastic greenhouses). What would a country which is all sand (and oil underneath) not give for a slice of this? We’ve rented our labour to the highest bidders, why not now our land too?

Meanwhile, the runaway train is heading for the buffers without a brakeman. OK, where’s my collection of old Mr Eds?

Another interesting point is that many of the current empty developments do not qualify for insulation certificates/minimum size requirements, under the new Green Party regime.
Therefore if the old stock is not disposed of before new developments are begun and completed;stands to reason that nobody would opt to buy one of these inferior apartments without a big discount, as it costs ten times more to insulate after completion-as opposed to doing the job during the construction stage.!
Under the new regulations much of the unsold stock would not be permitted on the market at all!
It is really an appalling situation that Fianna Fail permitted, toadying to developers, and now all their chickens are coming home to roost -together.
A firing squad is too good for the lot of them.

Below is a text to a private mail from a trading friend this morning- too good not to share…

“Did you watch the Senate hearing on Bloomberg?? Historical stuff indeed. I’ve been trading all week as the market is swinging wildly and easy to predict (just follow the herd – fly’s up for a few hours then fly’s down again) . A British cleric would refer to me as a bank robber for ‘shorting’ bank shares that everybody knew were not worth the money in the first place. Overnight, everybody has become an authority on the markets, the causes, the effects. It’s hilarious!! They’ve banned shorting now, so even if you know a share price is too high you can’t sell it and buy it back when it goes down. The Free market economy at it’s best!!

Mc Cain is making Bush look like a pretty honest politician. I’ve never watched so much television (financial news channels) – I’ve never had so much entertainment… ”were saved” – ”no were not” – etc.
Wall street are still hoping Paulson will give them 700 Billion so they can skedaddle with the loot. There is no way 700 Billion will cover the problem. None whatsoever and now the us taxpayers are starting to cop on.
All markets up again today – dollar gained 3 cents in a straight run against the pound. Mad it is. Like an afternoon in Paddy Powers with all the punters drunk and betting away their last few bob!!
It won’t be long before you’ll need a wheel barrow full of dollars to buy a newspaper anyway. Oddly enough gold price dropped today and dollars got stronger – see how long that lasts (48 hours?).

Who knows what
the landscape will be like there next year! Scorched!? The race is on.
See how many people now say they all knew this was coming. They all did apparently!!
Still not a mention of the real reason behind this debacle… ”credit swap derivatives” (Google it and look for old webpages). The blame lies firmly with
‘sub prime’ borrowers.

Ireland went up the most (far more then any boom in UK or US) and as a result will go down the most. IFSC will be closed for
business soon, as all the banks collapse or curtail their investment activities. Zero tax revenue for Ireland.
Should be an interesting few days ahead.”

This is slightly off-topic…but I think we are over focusing on finance at the expense of everything else. David’s article is merely a tactical short to medium response to a current situation rather than anything strategic.

Just came back on a buiz trip in Rennes – France…you know…the so called basket case economy that should have dissappeared down the tube years ago. They laugh completely at the notion of financial led improvments for an economy so beloved of the US/ UK etc. They have their unions, the hefty taxes etc and it’s pretty anti business in terms of regulation etc. And yet you can buy a decent meal for 50% what it costs in Ireland – and this place works!

Ask your typical frenchman how much money he has in the bank…it’s small – but he needs relatively little. Property prices are realistic. You have superb roads infrastructure etc etc..oh, and probably the best health system in the world.

As of a few days ago, this “basket case” “strike ridden” economy now owns the UK nuclear power generation industry. They have the skills in every Hi-Tech area you can dream of. They are not macho about it – ther’s no “Tigre Francaise” nonsense. It just works – and they had their long lunches – but they put in the hours when it’s needed. There is a passion in what they do and they seem to be able to call upon it again and again.

I have dealt with their Public service. It is huge! It is also efficient, has teeth and is generally easy to work with…just do not break the rules. I see brits and paddies trying to be sneaky and it fails every time.

It is laughable watching Dragon’s Den, The Apprentice etc all so representative of now failed economies. When are we going to realise that building nations is a major technical and scientific undertaking in all spheres of knwoledge ranging from Finance to Science/Engineering, from Business Admin to Public Admin, from Planning to Social Engineering, Agriculture to BioTech and so on. It is not just about Money and Entrepreneurs and the rest looks after itself…it patently does not. It all has to be managed.

Ireland at its peak was only a shadow of thr Brittany/Normandy area in terms of infrastructure and skillsets. Let’s be very clear about that. The finances etc are total hogwash. Just reach out and touch it and it’s there.

The problem in Ireland is one of management competence, public service competence and accountability. And believe me, our public service must be one of the most stupid and unaccountable and unresponsive there is. With the exception of some true intellects

We can screw around with financial engineering and shoring up this/ that other investor confidence….but until we start to tackle root cause issues of accountability and managerial competence, we are wasting our time.

Philip > that 2.3 Trilliion pays for goodies from China and Germany etc.

Correct, China’s boom is based mainly on the US’s consumption (European consumption too, and Japan). The US has a huge level of consumer debt, which like their mortgage debt, may start going bad as people cant pay of the interest or capital. Also to note is that many of the ARM mortgages had yet to kick in at market rates.

Philip > Real leadership is needed here. We need an all-party coalition to come up with a solution that works.

I dont think an all-party coalition is called for, as its not as if the parties concerned have common ground on the faults and the repairs, etc. If I was FG, I would hold out for the next general election, and snipe positively, and keep their solution powder dry until the election capmpaign. If I was FF, I would start to look in the mirror, realise they messed up, and come clean, put hands up and say, yes, we made a mess of things, we let the county run too far ahead of itself, we are changed, we see the light, etc. Without a mea culpa they will/should suffer at the polls, although guessing the Irish electorate is impossible as some turkeys do vote for Xmas religiously.

By the way, in terms of Brian Lenihan and Cowen blaming the global factors for our woes, I totally agree with Eddie Hobbs that such an analysis is completely bogus. Those global credit blowing-up problems have not even wafted in here yet. Our problems thus far are mostly our own making, cost competitiveness, a property/credit binge.

Joe > The Irish house price bubble is the most ludicrous asset bubble since the tulip. It makes the bubble in US housing seem like chicken feed. Why are we not seeing a rapid and total collapse of prices?

There are two things to consider with a bubble, one is the affordability that people have with their salaries, the other are the actual prices. In the US, the credit binge was much worse than here, even though prices may not have escalated percentage wise as much as ours did. Our prices will continue to drop in a sticky manner. People are reluctant to sell, people are reluctant to buy. It moves down, but slowly. 10% in 12 months. We may see 10% in the next 12 months or 20%.

> the 28 year cycle

I think there can be long-scale cycles. My theory is that at all times we are in a unique situation, as the global economic systems change and evolve over time. Our systems become exotic. eg: we dropped the gold standard in 1971 due to the US’s Vietnam war. It wasnt the first gold standard system. Without it, countries can print money as they like. Its a tust system based on inflation. Then, there are wars to interrupt things, and cause dislocations and “consumption of infrastucture”. Afterwards there is usually a baby boom and a growth boom. We got the benefit of that post 1945 and post 1921, the roaring 20′s. Did too much though, etc. Patterns are doomed to repeat itself, humans make the same mistakes all the time, they are fallible, you and me too. David is good at looking back through historical situations such as Venice, Roman empire or whatever, and applying it to today’s situations. Thats okay in itself, but we are now uniquely different. Each generation is. eg: monoline insurers only came into being in 1989. In 1932, there was no credit swap derivatives, etc, etc. So, 28 year cycle is not cast in stone.

Lorcan Roche Kelly > I have another visualisation for a Trillion Dollars. Take a $1000 bill. Lay it flat on the ground. Place another on top of it (flat). Repeat the process. When your pile is 67 miles high, you have a trillion dollars.

So that’s what Bush meant when he said they were gonna send humans to Mars. They were gonna print themselves to it!

> the exposure of Japanese banks to the sub-prime market in the US.

My understanding is that the Japanese have little exposure to the US property mess. They were ulta conservative, missed the gains from it going up in 2004-2007 but as a result have much stonger balance sheets.

> There is a difference between the US and Ireland. In the US you can declare bankruptcy throw the keys back at the bank, and spend a few years rehabilitating your credit, so you can buy back in at a reasonable price. That’s almost an incentive to let the bank foreclose on a house that you vastly overpaid on. Try that in Ireland !
Therefore it’s reasonable to assume that far fewer Irish mortgage holders will walk away from their homes, leading to relatively fewer foreclosures.

In the US they have a credit rating system that is (was?) tougher than ours. We can of course stop paying the bank for mortgages and they will have to take the property back. It IS happening. But, we dont have the level the US has. Our banks are likely to sell the properties as well. Unless they want to hold onto them and not mark them down to market or firesale them. It will depend on volumes. Remember, in the US they are gonna foreclose 2m homes this year alone after last years record.

> The Chinese can build roads, ports, rail systems in a fraction of the time that we can

Not really. They have cheaper Purchasing Power Parity levels all round. They also have more ‘undemocratic’ planning laws. Compulsory purchases treat citizens very poorly. Environment issues, forget it. Go to a city in the rural areas and the pollution levels will astound you. Dont forget the human rights aspects in China and lack thereof percolates all the way down to every Joe Bloggs (or Wang Lee as it were) on the street. The state which does most of the building can get things done but they ride-over the citizens. Gleaming towers mean nothing. They can be as a direct result of slavery or near-slavery conditions. Look at the pyramids as a long-lasting example. China has 100′s of millions of poor people. The forgotten Chinese.

RTE > The Fed, the Bank of England, the Swiss National Bank and the ECB will offer dollars to the markets on one-week arrangements. ‘These operations are intended to meet end-of-quarter pressures’, the ECB said. Banks typically seek extra funds at the end of each quarter to help them balance their books but in the current financial market turmoil, credit has all but dried up, creating huge liquidity problems.

This is what I dont get. Credit has dried up, but the lack of it after such a massive credit binge should not affect anything. Its like the alcohol party situation. The drunks are still at the bar the next morning asking for more, and because their living is predicated on it, the bar staff (in this case the central banks) are giving them some shots to keep them going. Its only delaying what has to be done, and that is reducing the credit amounts.

As for the 700 billion bailout in the US, that is a movement from the poor to the wealthy. Banks and bank staff will always think they will be bailed out. They cant lose. There are no repercussions.

And here’s something else to think of. Money is just the movement of a metric of work, either done or promised to do (ie: a loan). Yet the system we have in place has all these people working in banks, etc, just moving the money. They are NOT actually dong any real productive work, producing, consuming, supplying a service, etc. They are just moving the units. If we have gleaming towers that are banks, the system ew have created is completely inefficient, as it is reqarding those that are moving the money, the units of work, far more than those producing the damn stuff with effort.

Maybe this financial crises is a good thing. Maybe if the Credit Swaps cause the financial world globally to fall down it will be a good thing. The Roman Empire didnt survive, and perhaps that was good, and I fear that our current systems are flawed and will fail at some point. And that perhaps is good.

By the way, I know what the monkey’s are doing. Think of bonobo’s! :-) When times are tough financially, at least us humans still have that as a pleasant pastime. It is free after all and satsifies at least 50% of the global population, the XY ones! ;-)

Say what you want about whats going on in the states … but at least its upfront the population is not being mis sold something, its basically is every taxpayer in the states going to give Wall Street $5,400 to save their sorry asses.

Is there no one in government here who can do some straight talking, stop hiding behind lies like “helping first time buyers”